Europe’s Banks Urged to Keep Trading and Lending Operations Separate

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The New York Times
Wednesday, October 03, 2012

Europe’s Banks Urged to Keep Trading and Lending Operations Separate

By JAMES KANTER

BRUSSELS — Banks in the European Union should quarantine their risky trading activities from their everyday savings and lending operations, as a way to safeguard the financial system and avoid future bailouts at taxpayers’ expense, a panel of financial experts recommended Tuesday.

The recommendation, from a group led by the Bank of Finland’s governor, in some ways recalls the old Glass-Steagall Act in the United States, which for decades after the 1929 stock market crash kept stock trading and other investment banking activities separate from retail lending. The U.S. restrictions were repealed in 1999, and many critics have said that the change paved the way for the sort of risk taking that eventually required Washington to bail out the country’s biggest banks in 2008.

The European proposal would stop short of requiring full separation of investment banking and commercial banking into two different companies, as Glass-Steagall did. Instead, banks that engaged in risk-taking activities beyond a certain level would have to be put into a separate unit of the same company.

But the proposal is an indication of how intent many policy makers have become on responding to recent bank failures in Britain, Spain and elsewhere that have left European governments with huge debts, stymied growth and stifled the region’s recovery from its lingering debt debacle.

The report will now be pored over by the officials who commissioned it: José Manuel Barroso, president of the European Commission, and Michel Barnier, the European commissioner for financial services. It will be up to them to decide whether to start the long legislative process that could eventually result in the banking restrictions becoming law throughout the 27-nation European Union.

The Finnish bank official, Erkki Liikanen, was chairman of the panel after being assigned the task early this year by Mr. Barroso and Mr. Barnier. His group’s report blamed excessive risk taking, often in trading of highly complex securities or in real estate-related lending, and excessive reliance on short-term funding, for helping create the financial crisis.

Already, though, the group’s proposals have met opposition from major lenders, which want to avoid additional banking restrictions. Europe is already pushing various other reforms in banking and finance, which include requiring larger capital reserves for risk-taking parts of the business, as well as expanded powers for the European Central Bank to oversee every bank in the euro currency union.

Guido Ravoet, the chief executive of the European Banking Federation, a group of national associations representing 4,500 banks, said his members “are concerned over the proposal to ring-fence trading activities of the bigger banks into a separate part of the banking structure.” He said the proposal “seems not to fully acknowledge the major regulatory changes already put in place and those still forthcoming.”

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